Oil prices hit by resumed hedge fund short selling: Kemp
By John Kemp
LONDON, Jan 8 (Reuters) - Portfolio investors resumed selling petroleum futures and options, especially those tied to crude, amid renewed doubts about growth in oil consumption in 2024.
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Hedge funds and other money managers sold the equivalent of 66 million barrels in the six most important petroleum futures and options contracts over the seven days ending on Jan. 2.
Sales were concentrated in crude (-63 million barrels), distributed roughly equally between NYMEX and ICE WTI (-33 million) and Brent (-30 million).
There were only minor sales of European gas oil (-5 million barrels), minor purchases of U.S. gasoline (+1 million) and no change in U.S. diesel.
Chartbook: Oil and gas positions
On the crude side, nearly all the sales came from the establishment of new bearish short positions (+59 million barrels), rather than the liquidation of existing bullish longs (-3 million).
Fund managers resumed the short selling that prevailed for ten weeks until Dec. 12, when it was interrupted by two weeks of repurchasing before year end.
In the premier NYMEX WTI contract, short positions were boosted to 121 million barrels, not far below the previous peak of 128 million on Dec. 12.
Before the end of the calendar year, short covering provided only limited price support. With the start of a new year, renewed selling has put them under downward pressure again.
Most funds are focusing on the threat to consumption from slow global growth rather than to production from conflict in the Middle East.
Increasing production from Brazil, Guyana and U.S. shale plays is expected to be enough to satisfy anaemic consumption growth in 2024.
In addition, there is an assumption Saudi Arabia and its OPEC+ partners can't or won't cut output further to lift prices sustainably in the short term.
Cutting production again would simply throw another lifeline to rival producers and concede even more market share.
U.S. NATURAL GAS
In contrast to crude, investment managers continued to square up bearish positions in futures and options linked to U.S. gas.
Hedge funds and other money managers purchased the equivalent of 365 billion cubic feet (bcf) over the seven days ending on Jan. 2.
Funds had been net buyers in each of the most recent three weeks, purchasing a total of 709 bcf since Dec. 12.
Strong El Nino conditions in the Pacific have produced a warmer-than-average winter so far across the Lower 48 states.
Gas stocks ended the year at 3,476 bcf, the highest for the time of year since 2015, when there was also a very strong El Nino.
As a result, inventories were 312 bcf (+10% or +1.18 standard deviations) above the prior ten-year seasonal average, and the surplus had swelled from 60 bcf (+2% or +0.23 standard deviations) on Oct. 6.
But prices have already fallen so far they averaged just $2.54 per million British thermal units in December 2023, putting them in only the 5th percentile for all months since the start of the century, after adjusting for inflation.
Funds have squared up some short positions in the expectation that prices are unlikely to fall much further and the balance of risks is tilted to the upside.
Fund managers still held a bearish net short position of 289 bcf (24th percentile for all weeks since 2010) on Jan. 2, but the position had been raised from a net short of 999 bcf (8th percentile) three weeks earlier.
John Kemp is a Reuters market analyst. The views expressed are his own. (Editing by Jan Harvey)